Question

A single commercial bank must meet a 25 percent reserve requirement. If the bank has no excess reserves initially and $5,000 of cash is deposited in the bank, it can increase its loans by a maximum of__________

Answer 1

Answer:

The bank can increase its loans by a maximum of $3750.

Explanation:

required reserves = Deposits×reserve ratio

                              = $5000×25%

                              = $1250

Lending capacity or loan = Deposits - required reserves

                                          = $5000 - $1250

                                          = $3750

Therefore, the bank can increase its loans by a maximum of $3750.